PART I.  FINANCIAL INFORMATION 

Item 1.  Financial Statements

 

 

EQM is a growth-oriented Delaware limited partnership. EQT Midstream Services, LLC (EQM General Partner) is a direct wholly owned subsidiary of EQT GP Holdings, LP (EQGP) and is the general partner of EQM.

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements include all adjustments (consisting of only normal recurring adjustments, unless otherwise disclosed in this Form 10-Q) necessary for a fair presentation of the financial position of EQM as of JuneSeptember 30, 2017 and December 31, 2016, the results of its operations for the three and sixnine months ended JuneSeptember 30, 2017 and 2016 and its cash flows and equity for the sixnine months ended JuneSeptember 30, 2017 and 2016. Certain previously reported amounts have been reclassified to conform to the current year presentation. The balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

AVC, Rager and the Gathering Assets were businesses and the October 2016 Acquisition was a transaction between entities under common control; therefore, EQM recorded the assets and liabilities of these entities at their carrying amounts to EQT on the date of the transaction. The difference between EQT’s net carrying amount and the total consideration paid to EQT was recorded as a capital transaction with EQT, which resulted in a reduction in equity. EQM recast its consolidated financial statements to retrospectively reflect the October 2016 Acquisition as if the entities were owned for all periods presented; however, the consolidated financial statements are not necessarily indicative of the results of operations that would have occurred if EQM had owned them during the periods reported.

Due to the seasonal nature of EQM’s utility customer contracts, the interim statements for the three and sixnine months ended JuneSeptember 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in EQM’s Annual Report on Form 10-K for the year ended December 31, 2016 as well as “Management’s“Management's Discussion and Analysis of Financial Condition and Results of Operations” contained therein.

The following table summarizes EQM's limited partner common units and general partner units issued from January 1, 2016 through December 31, 2016. EQM did not issue any units during the first sixnine months ofended September 30, 2017.

 

 

In the ordinary course of business, EQM engages in transactions with EQT and its affiliates including, but not limited to, transportation service and precedent agreements, storage agreements and gas gathering agreements. Pursuant to the omnibus agreement, EQT performs centralized corporate, general and administrative services for EQM. In exchange, EQM reimburses EQT for the expenses incurred in providing these services, including direct and indirect costs and expenses attributable to EQT's long-term incentive programs. Pursuant to an operation and management services agreement, EQT Gathering, LLC (EQT Gathering), an indirect wholly owned subsidiary of EQT, provides EQM’s pipelines and storage facilities with certain operational and management services. EQM reimburses EQT Gathering for such services pursuant to the terms of the omnibus agreement. The expenses for which EQM reimburses EQT and its subsidiaries may not necessarily reflect the actual expenses that EQM would incur on a stand-alone basis and EQM is unable to estimate what those expenses would be on a stand-alone basis.

In MayAugust 2017, the MVP Joint Venture issued a capital call notice to MVP Holdco, LLC (MVP Holdco), a direct wholly owned subsidiary of EQM, for $18.3$48.0 million, of which $5.5$27.2 million was paid on July 13,in October 2017 and the remaining $12.8$20.8 million is expected to be paid on August 15,in November 2017. The capital contribution payable has been reflected on the consolidated balance sheet as of JuneSeptember 30, 2017 with a corresponding increase to EQM's investment in the MVP Joint Venture.

Equity income related to EQM's portion of the MVP Joint Venture's AFUDC on construction of the MVP is reported in other income in the statements of consolidated operations and was $5.1$6.0 million and $1.9$2.7 million for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and $9.4$15.4 million and $3.4$6.1 million for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively.

As of JuneSeptember 30, 2017, EQM had issued a $91 million performance guarantee in favor of the MVP Joint Venture to provide performance assurances for MVP Holdco's obligations to fund its proportionate share of the construction budget for the MVP. Upon the FERC’s initial release to begin construction of the MVP, EQM's guarantee will terminate andterminate. EQM will then be obligated

As of JuneSeptember 30, 2017, EQM's maximum financial statement exposure related to the MVP Joint Venture was approximately $352$431 million, which includedconsists of the investment in unconsolidated entity balance on the consolidated balance sheet as of JuneSeptember 30, 2017 and amounts which could have become due under theEQM's performance guarantee as of that date.

EQM had no$105 million of borrowings outstanding on its $750 Million Facilitycredit facility as of JuneSeptember 30, 2017 and had no borrowings outstanding as of December 31, 2016. There were noDuring the three and nine months ended September 30, 2017, the maximum amount of EQM's outstanding borrowings outstandingunder the credit facility at any time duringwas $177 million and the sixaverage daily balances were approximately $95 million and $32 million, respectively. Interest was incurred at a weighted average annual interest rate of approximately 2.7% for the three and nine months ended JuneSeptember 30, 2017. During the three and sixnine months ended JuneSeptember 30, 2016, the maximum amounts of EQM’s outstanding borrowings under the credit facility at any time were $128$91 million and $299 million, respectively, and the average daily balances were approximately $33$34 million and $83$67 million, respectively. Interest was incurred at a weighted average annual interest raterates of approximately 2.0% and 1.9% for the three and sixnine months ended JuneSeptember 30, 2016.2016, respectively.

As a result of its limited partnership structure, EQM is not subject to federal and state income taxes. For federal and state income tax purposes, all income, expenses, gains, losses and tax credits generated by EQM flow through to EQM's unitholders; accordingly, EQM does not record a provision for income taxes.

As discussed in Note A, EQM’s consolidated financial statements have been retrospectively recast to include the pre-acquisition results of AVC, Rager and the Gathering Assets, which were acquired by EQM effective on October 1, 2016, because the transaction was between entities under common control. Accordingly, the income tax effects associated with these operations prior to acquisition are reflected in the consolidated financial statements as they were previously part of EQT’s consolidated federal tax return.

 

On July 25,October 24, 2017, the Board of Directors of the EQM General Partner declared a cash distribution to EQM’s unitholders for the secondthird quarter of 2017 of $0.935$0.98 per common unit. The cash distribution will be paid on AugustNovember 14, 2017 to unitholders of record at the close of business on August 4,November 3, 2017. Based on the 80,581,758 EQM common units outstanding on July 27,October 26, 2017, cash distributions to EQGP will be approximately $20.4$21.4 million related to its limited partner interest, $1.9$2.1 million related to its general partner interest and $34.2$37.6 million related to its IDRs in EQM. The distribution amounts to EQGP related to its general partner interest and IDRs in EQM are subject to change if EQM issues additional common units on or prior to the record date for the secondthird quarter 2017 distribution.

Disclosures in this Quarterly Report on Form 10-Q contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  Statements that do not relate strictly to historical or current facts are forward-looking and usually identified by the use of words such as “anticipate,” “estimate,” “could,” “would,” “will,” “may,” “forecast,” “approximate,” “expect,” “project,” “intend,” “plan,” “believe” and other words of similar meaning in connection with any discussion of future operating or financial matters.  Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report on Form 10-Q include the matters discussed in the section captioned “Outlook” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the expectations of plans, strategies, objectives, and growth and anticipated financial and operational performance of EQM, including guidance regarding EQM’s gathering and transmission and storage revenue and volume growth; infrastructure programs (including the timing, cost, capacity and sources of funding with respect to gathering and transmission expansion projects); the cost, capacity, timing of regulatory approvals and anticipated in-service date of the MVP project; expansion projects in EQM's areas of operations and in areas that would provide access to new markets; asset acquisitions, including EQM’s ability to complete asset acquisitions from EQT or third parties; the expected benefits to EQM of EQT's proposed acquisition of Rice Energy Inc. (Rice), including whether EQT will complete the proposed acquisition and, if so, whether it will sell Rice's remaining midstream assets to EQM; the amount and timing of distributions, including expected increases; the amounts and timing of projected capital contributions and operating and capital expenditures, including the amount of capital expenditures reimbursable by EQT; the impact of commodity prices on EQM's business; liquidity and financing requirements, including sources and availability; the effects of government regulation and litigation; and tax position. The forward-looking statements included in this Quarterly Report on Form 10-Q involve risks and uncertainties that could cause actual results to differ materially from projected results.  Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results.  EQM has based these forward-looking statements on current expectations and assumptions about future events. While EQM considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are difficult to predict and are beyond EQM’s control. The risks and uncertainties that may affect the operations, performance and results of EQM’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors” in EQM’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Any forward-looking statement speaks only as of the date on which such statement is made and EQM does not intend to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise.

 

In reviewing any agreements incorporated by reference in or filed with this Quarterly Report on Form 10-Q, please remember that such agreements are included to provide information regarding the terms of such agreements and are not intended to provide any other factual or disclosure information about EQM. The agreements may contain representations and warranties by EQM, which should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements should those statements prove to be inaccurate. The representations and warranties were made only as of the date of the relevant agreement or such other date or dates as may be specified in such agreement and are subject to more recent developments.  Accordingly, these representations and warranties alone may not describe the actual state of affairs of EQM or its affiliates as of the date they were made or at any other time.

For the three months ended JuneSeptember 30, 2017, EQM reported net income of $139.1$142.9 million compared to $131.9$133.7 million for the three months ended JuneSeptember 30, 2016. The increase primarily resulted from higher revenues from both gathering and transmission, which were driven mainly by affiliate and third party and affiliate production development in the Marcellus Shale, and lower income taxes, partly offset by an increase in operating expenses, higher net interest expense and lower other income.

 

Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally and is subject to evaluation by the chief operating decision maker in deciding how to allocate resources. Other income and net interest expense are managed on a consolidated basis. EQM has presented each segment’ssegment's operating income and various operational measures in the following sections. Management believes that the presentation of this information provides useful information to management and investors regarding the financial condition, results of operations and trends of segments. EQM has reconciled each segment’s operating income to EQM’s consolidated operating income and net income in Note D to the consolidated financial statements.

Gathering revenues increased by $12.0$17.4 million for the three months ended JuneSeptember 30, 2017 compared to the three months ended JuneSeptember 30, 2016 driven by third party and affiliate production development in the Marcellus Shale. EQM increased firm reservation fee revenues primarily as a result of affiliatesthird parties and third partiesaffiliates contracting for additional firm gathering capacity on various affiliate wellhead gathering expansion projects and the Range Resources Corporation (Range Resources) Header Pipeline project.project and various affiliate wellhead gathering expansion projects. The decrease in usage fees under firm contracts was due to lower affiliate volumes in excess of firm contracted

Operating expenses increased by $1.9$4.1 million for the three months ended JuneSeptember 30, 2017 compared to the three months ended JuneSeptember 30, 2016. Operating and maintenance expense increased2016 primarily as a result of higher repairs and maintenance expenses associated with increased throughput. Selling, general and administrative expenses decreased primarily due to lower corporate allocations from EQT as a result of EQT’s shift in focus during 2017 from midstream drop-down transactions to upstream asset and corporate acquisition projects. The increase in depreciation and amortization expense resulted fromof $2.3 million due to additional assets placed in-service including those associated with the Range Resources Header Pipeline project and the NWV Gatheringa Northern West Virginia Marcellus gathering system (NWV Gathering) expansion project.project and higher personnel costs.

Gathering revenues increased by $16.3$33.7 million for the sixnine months ended JuneSeptember 30, 2017 compared to the sixnine months ended JuneSeptember 30, 2016 driven by third party and affiliate production development in the Marcellus Shale. EQM increased firm reservation fee revenues primarily as a result of affiliates and third parties contracting for additional firm gathering capacity on various affiliate wellhead gathering expansion projects and the Range Resources Header Pipeline project. The decrease in usage fees under firm contracts was due to lower affiliate volumes in excess of firm contracted capacity. The decrease in usage fees under interruptible contracts was primarily due to the additional contracts for firm capacity.

Operating expenses increased by $5.2$9.2 million for the sixnine months ended JuneSeptember 30, 2017 compared to the sixnine months ended JuneSeptember 30, 2016. Operating and maintenance expense increased2016 primarily as a result of higher personnel costs. Selling, general and administrative expenses decreased primarily due to lower corporate allocations from EQT as a result of EQT’s shift in focus during 2017 from midstream drop-down transactions to upstream asset and corporate acquisition projects partly offset by increases in other miscellaneous administrative costs of $1.3 million. The increase inincreased depreciation and amortization expense resulted fromof $5.9 million due to additional assets placed in-service including those associated with the Range Resources Header Pipeline project and thea NWV Gathering expansion project.project and higher personnel costs.

Transmission and storage revenues increased by $8.9$13.0 million for the three months ended JuneSeptember 30, 2017 compared to the three months ended JuneSeptember 30, 2016. Firm reservation fee revenues increased due to affiliates contracting for additional firm capacity on the Ohio Valley Connector (OVC). Approximately $3.4 million of the increase was related to a FERC-approved retroactive negotiated rate adjustment for the period October 1, 2016 through June 30, 2017. The firm capacity on the OVC resulted in lower affiliate usage fees under firm contracts.

Operating expenses increased by $7.0$7.1 million for the three months ended JuneSeptember 30, 2017 compared to the three months ended JuneSeptember 30, 2016. The increases in operating and maintenance expense and depreciation and amortization expense were the result of the OVC project placed in-service in the fourth quarter of 2016. Operating and maintenance expense increased primarily due to property taxes on the OVC. Selling, general and administrative expenses decreased primarily due to lower corporate allocations from EQT as a result of EQT’s shift in focus during 2017 from midstream drop-down transactions to upstream asset and corporate acquisition projects.

Transmission and storage revenues increased by $22.3$35.3 million for the sixnine months ended JuneSeptember 30, 2017 compared to the sixnine months ended JuneSeptember 30, 2016. Firm reservation fee revenues increased due to affiliates and third parties contracting for additional firm capacity, primarily on the OVC, as well as higher contractual rates on existing contracts in the current year. The firm capacity on the OVC resulted in lower affiliate usage fees under firm contracts.

Operating expenses increased by $13.3$20.4 million for the sixnine months ended JuneSeptember 30, 2017 compared to the sixnine months ended JuneSeptember 30, 2016. OperatingThe increases in operating and maintenance expense increased primarily as a result of property taxes on the OVC and higher personnel costs. Selling, general and administrative expenses decreased primarily due to lower corporate allocations from EQT as a result of EQT’s shift in focus during 2017 from midstream drop-down transactions to upstream asset and corporate acquisition projects. Depreciationdepreciation and amortization expense increased primarily as awere the result of the OVC project placed in-service in the fourth quarter of 2016. Operating and maintenance expense increased primarily due to property taxes on the OVC and higher personnel costs.

Other income decreased by $3.7$6.6 million for the three months ended JuneSeptember 30, 2017 compared to the three months ended JuneSeptember 30, 2016 primarily driven by decreased AFUDC - equity of $4.2$7.2 million associated with the OVC project placed in-service in the fourth quarter of 2016 and distributions from EES of $2.8 million for the three months ended JuneSeptember 30, 2016 which were recorded as other income in 2016, partly offset by higher equity income related to EQM's portion of the MVP Joint Venture's AFUDC on the MVP. Other income decreased by $5.3$11.9 million for the sixnine months ended JuneSeptember 30, 2017 compared to the sixnine months ended JuneSeptember 30, 2016 primarily driven by distributions from EES of $5.5 million for the six months ended June 30, 2016 which were recorded as other income in 2016 and decreased AFUDC - equity of $5.4$12.6 million associated with the OVC project placed in-service in the fourth quarter of 2016 and distributions from EES of $8.3 million for the nine months ended September 30, 2016 which were recorded as other income in 2016, partly offset by higher equity income related to EQM's portion of the MVP Joint Venture's AFUDC on the MVP.

Net interest expense increased by $4.6$6.6 million for the three months ended JuneSeptember 30, 2017 compared to the three months ended JuneSeptember 30, 2016 primarily driven by $5.2 million of interest incurred on EQM's long-term debt issued in November 2016 and lower capitalized interest and AFUDC - debt of $0.8 million associated with decreased spending on regulated projects, partly offset by $1.7 million of interest income recorded on distributions from EES in 2017. Net interest expense increased by $7.9$14.6 million for the sixnine months ended JuneSeptember 30, 2017 compared to the sixnine months ended JuneSeptember 30, 2016 primarily driven by $10.3$15.5 million of interest incurred on EQM's long-term debt issued in November 2016 and lower capitalized interest and AFUDC - debt of $0.9 million associated with decreased spending on regulated projects, partly offset by $3.4$5.1 million of interest income recorded on distributions from EES in 2017.

See Note I to the consolidated financial statements for discussion of income tax expense.

 

See “Investing Activities” and “Capital Requirements” in the “Capital Resources and Liquidity” section below for a discussion of capital expenditures.

 

Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of EQM’s consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess: